Active or Passive investing?

Active Investing

Active investors and active funds aim to outperform a chosen benchmark or peer group or to meet a specific investment objective. Active funds are managed by professionals who use their knowledge and skill to analyse the chosen market and to decide where and how to invest, in line with the fund’s objectives. At Willis Owen, we offer two types of actively managed investments:

  • Active funds – pooled funds managed by a professional fund manager who actively chooses where and how to invest. These are usually priced daily with trading being carried out at the next available dealing point.
  • Investment Trusts - structured as a companies and listed on the London Stock Exchange. Again, the trust is managed by a professional fund manager who uses their skill and judgement to select investments. Shares in investment trusts can be traded at a discount or premium to the value of the underlying assets. Investment trusts can borrow to invest which may increase risk.

Passive Investing

Passive investing and passive funds aim to replicate (but not outperform) the return of a particular market index. As such, passive funds do not depend on a professional making investment decisions. At Willis Owen, we offer two types of investment options which use a passive approach:

  • Passive funds - these are often referred to as index or tracker funds. Trading is carried out at the next available dealing point.
  • Exchange traded funds (ETFs) - these declare their holdings daily and are traded on the London Stock Exchange at prices which vary throughout the day.

Comparing active and passive investing:

  Active Management Passive Management
Approach Aims to outperform the market
An active manager invests in assets (such as shares, bonds) that they believe will help the investment meet its objectives.
Tracks a specific index
Tracks a particular index and so does not depend on a manager making investment decisions.
Techniques Stock-picking
Active managers analyse the market in order to identify and purchase assets (such as shares or bonds) that will help them meet their investment objectives.

Passive managers usually adopt one of two approaches to track their chosen index:
The replication approach
A very straightforward way to match an index. A manager buys the same shares as are in the index, in the same proportions as they are weighted in the index.
The sampling approach
A manager uses mathematical models to buy a range of securities that reflect the index. It is useful when the index is very large or complex.
Key benefits In-depth research and potential for out performance
Using skill to find investments that the manager believes will help meet the investment objectives.
Spreading investments across an entire index.
Low costs
Lower investment charges compared to actively managed investments.
Key risks Higher costs
Active management costs tend to be higher which will affect the total returns of the investment.
May underperform the benchmark
Although active managers aim to beat the benchmark, this is not guaranteed.
Total market risk
Your investment reflects the index the investment follows, so if the market as a whole falls, the value of the investment falls too.
Performance constraints
Index funds are designed to provide returns that closely track their benchmark index so will not outperform the benchmark.